On July 21, 2017, SIFMA, the self-proclaimed “voice of the U.S. securities industry,” submitted comments in response to Clayton’s request. Surprisingly, SIFMA, which had fought a years-long battle to delay, dilute and derail the DOL’s fiduciary rule, welcomed the SEC’s efforts to develop one. It also openly encouraged cooperation between the SEC and the DOL in developing the new standard.
This seeming contradiction makes sense. Without a well-defined best interest standard, the brokerage industry remains in a precarious position when it comes to delivering personalized advice to retail clients. It is in danger of being swept under the Advisers Act fiduciary standard, an outcome that would disrupt its current business model. It needs a safe harbor.
Also, advisors have gained a distinct marketing advantage over brokers because of the higher standard to which they are held. According to Cerulli Associates, 42 percent of all assets managed by a financial advisor are now subject to a fiduciary standard, up from 25 percent in 2005. Many of the brokerage industry’s best and brightest have migrated to the fiduciary advisor world. Some of the largest players in the brokerage industry recently left the brokerage protocol in an attempt to stem the flow. Putting a fiduciary-lite standard in place for brokers would be another way.
Further, the brokerage industry does not like the best interest standard contained in the DOL’s fiduciary rule. It is as long and complex as an organic chemistry textbook. The industry views its rules-based approach as a compliance nightmare. It allows individual investors to sue for violations of the standard. The DOL standard is the worst of all possible worlds for brokers.
Involving the DOL in the dialog with the SEC might create more palatable alternatives. If the resulting SEC standard is pleasing enough and the DOL is involved in its creation, portions of it might be incorporated into a revised DOL rule. The brokerage industry might be able to substitute a principles-based upgrade for the nit-picky details of the existing DOL rule.
The Brokerage Industry Shows Its Cards
SIFMA’s comments make the brokerage industry’s strategy for achieving its goals quite clear. First, it rejects the existing regulatory structure for the reasons described above. It also rejects the idea of using disclosure to deal with the problem of investor confusion. The brokerage industry does not like the prospect of clearly stating that advisors are subject to a fiduciary standard, while brokers are subject to the lower suitability standard.
SIFMA further rejects the idea of a “uniform standard that is ‘no less stringent than’ the Advisers Act standard.” It bases its position on the “inherent differences between BDs and [RIAs].” SIFMA correctly assumes that it would be impossible to develop a standard that both maintains the stringency of the Advisers Act standard, while allowing brokers to charge commissions, principal trade and sell proprietary products.
After rejecting these other alternatives, SIFMA lays out its vision for a “uniform fiduciary standard that applies equally to BDs and [RIAs] when providing personalized investment advice about securities to retail clients.” Upon examination, however, SIFMA’s vision is neither uniform, nor does it apply a fiduciary standard to brokers.